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What the TED Spread Says About the Global Recession Risk, Volatility and Europe

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A look at the 28 fears making investors nervous this week, including the rise of this key economic indicator.

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What is the TED Spread and why are investors worried about it?

An important economic indicator, the TED spread measures the difference between the interest rates on US T-bills (thus the 'T') and interbank loans (or LIBOR, represented by Eurodollar futures or the "ED" ticker on the CME). When the spread widens, it means investors are nervous about credit risk and the possibility of defaults, sending LIBOR rates higher and T-bill rates lower.

Not surprisingly, given recent trends and the Eurozone crisis, the Ted spread has increased to just below 37 basis points this month, much higher than the safer 20 to 25 basis points range we saw in the spring.

The move was quiet one (the spread is still nowhere near the highs it reached in 2008, when it once soared above 450 basis points), but the uptick means that investors are increasingly fearful about the big events able to rock global markets, like the future of the Eurozone bailout, volatility, and the fast-approaching US 'super committee' deadline.

This week, "Lloyd's Wall of Worry" stands at 28 blocks, high enough for value investors to keep looking for deals. For commentary on each of the issues facing investors right now, click on the image below or scroll down for a text only version of this column and an explanation of how it works.





QE: More coming from the UK. Let's hear it for the Brits with the chips!

US ECONOMY: Corporate profits are still looking good. Corporate workers still looking the opposite of good.

UNEMPLOYMENT: Jobless claims aren't getting worse. Not for nothing, but exactly what type of wage does a jobless claim pay anyway?

GLOBAL DELEVERAGING: "Round and round she goes, where she stops nobody knows…."

INVESTOR SENTIMENT:
Interest is building! Though "Occupy Wall Street" is not likely the type of interest the markets were looking for.

HOUSING CRISIS:
Saw a note that mattress sales ticked up last quarter. Hmmm, start of a housing recovery, or a surge in "escort" demand?

INFLATION: Food costs on the rise again. To wit I've created "The Commodity Diet." Go grocery shopping, and when you see the prices you'll either lose your appetite or not be able to afford anything.

CRISIS OF CONFIDENCE: "If I had a boat, I'd go out on the ocean…."

COMMODITIES: Dropping so fast that the market wizards now fear a recession signal is being flashed. My advice, move away from the screen.

EUROPEAN ECONOMY: "Don't give up on us baby, we're still worth one more try…"

THE EUROPEAN UNION: Now people are looking for the "elephants in the room." I've got news for you: in this EU Circus it's all elephants, baby!

US CONSUMER CONFIDENCE:
Perked up a bit in the last reading. Signs of life or rigor mortis, no one is quite sure.

SOVEREIGN DEBT:
Haircuts coming. Going to skip the stylist and go right to the barber for a buzz cut.

POLICY MISTAKE:
None yet. Looks like this "Paralysis Plan" is a real winner.

EUROPEAN CENTRAL BANK: Print `em if you got `em…wait for it, wait for it, wait for it....

GREECE:
Corporations worldwide waiting patiently for the Coliseum naming rights to come up for grabs.

CURRENCIES:
The Brazilian real gets real. Real free fallin', that is.

ITALY & SPAIN: Ring fence the banks, ring fence the debt, ring fence the countries, but for goodness sake, maintain open access to their delicious food.

ECONOMIC LEADERSHIP: Sarkozy and Merkel stepping forward. Or maybe they're getting pushed.

CONGRESSIONAL SUPER COMMITTEE: Time to break out the "lower the bar/expectations" playbook.

GLOBAL RECESSION: All eyes on Europe…and the U.S….and China…and Brazil…and Japan.

BANKS:
Can someone post a new definition for these things because the old "place to protect and grow your savings" isn't working for me.

VOLATILITY: Renovating my office desk and chair today; installing shock absorbers, shoulder harness and air bags.

US CONGRESS:
Buddy, can you spare a trillion?

HIGH FREQUENCY TRADING:
Hal: Recent academic research points to high frequency trading theoretically providing tighter spreads and better pricing for small investors.
Lloyd: Same academics that brought us the twin delights of Portfolio Insurance and Long-Term Capital Management?
Hal: My programming doesn't go back that far.
Lloyd: Bingo.

CHINA: The trade winds may be blowing in a trade war.

ETFs:
You can't spell "the willful systematic destruction of the global equity markets" without E-T-F-S.

TED SPREAD: The TED Spread, a credit risk indicator, is rising. Hello? Anyone watching this thing?


What is Lloyd's Wall of Worry?
by Lloyd Khaner

Welcome to my at-a-glance guide to the issues facing investors this week -- a unique tool for traders and money managers.

Typically the term "wall of worry," refers to the entire body of concerns influencing stock market action. When the wall is high, meaning the market is nervous, stocks tend to get cheaper.

This wall of worry is even more specific. Every week I list the exact concerns in the marketplace and use the list to help me make buying and selling decisions. As I like to say, "Buy fear, sell cheer."

In other words, once the the wall rises above 15 blocks, start looking for deals. If the worry count sinks below 10, consider selling; prices have likely peaked.


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No positions in stocks mentioned.
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